Depreciation Under the Income Tax Act: A Complete Guide to the Block of Assets
Understanding block-wise WDV computation, additions, sales, and when a block ceases to exist Depreciation is one of the most useful deductions available to a business, and once you understand how the block of assets system works, calculating it becomes refreshingly straightforward. Unlike the Companies Act, which tracks depreciation asset-by-asset, the Income Tax Act uses a simpler, more efficient block approach. This guide walks through the concept step by step, with worked examples, so you can apply it confidently to any client’s fixed asset schedule. 1. The Block of Assets Concept Section 2(11) of the Income Tax Act defines a ‘block of assets’ as a group of assets falling within the same class — tangible assets such as buildings, machinery, plant, or furniture, or intangible assets such as patents, copyrights, trademarks, licences, and franchises — for which the same rate of depreciation is prescribed. In practice, this means you do not depreciate each machine or vehicle individually. Instead, every asset eligible for the same rate is pooled into one block, and depreciation under Section 32 is computed on the written down value (WDV) of the block as a whole, not on individual assets. This has a few important consequences: Once an asset enters a block, it loses its individual identity for depreciation purposes. You do not need to track the WDV of each individual asset year after year — only the block’s combined WDV. Gain or loss on sale of an individual asset is generally not computed separately; it flows through the block (see Section 4). Good practice: maintain a fixed asset register with individual asset detail for internal control and audit purposes, even though the tax computation itself only needs block-level figures. 2. Rates and Classification of Blocks The Income Tax Rules (Appendix I) prescribe the rate applicable to each class of asset. A few commonly used rates are illustrated below — always verify the current rate against the latest Rules before filing, as rates and classifications are occasionally revised. Block Illustrative Assets Rate of Depreciation Building (residential) Staff quarters, residential buildings 5% Building (non-residential) Factory, office premises 10% Furniture and fittings Furniture, fixtures 10% Plant and machinery (general) General plant and machinery 15% Motor vehicles (general use) Cars, vans not used in a hiring business 15% Computers, including software Computers, laptops, software 40% Intangible assets Patents, trademarks, licences, franchises 25% 3. Computing Depreciation: The Basic WDV Formula Depreciation for the year is computed on the WDV of the block as at the beginning of the year, adjusted for additions and deletions during the year: Depreciation = Rate × [Opening WDV of block + Cost of assets acquired during the year − Sale consideration/moneys receivable for assets sold, discarded, or destroyed during the year] This adjusted figure — opening WDV plus additions minus deletions — is what the Act calls the WDV of the block as on the last day of the previous year, and it is this figure to which the rate is applied. 4. Additions During the Year — the 180-Day Rule When a new asset is added to a block during the year, the depreciation allowed depends on how long it was used in that year: Asset put to use for 180 days or more in the year of acquisition: full year’s depreciation at the normal rate. Asset put to use for less than 180 days in the year of acquisition: depreciation restricted to 50% of the normal rate, for that year only. The 180-day test looks only at the date the asset is put to use, not the date of purchase or invoicing. From the following year onward, the asset merges fully into the block and the 180-day restriction no longer applies — the full rate is charged on the entire block WDV, addition included. 5. Sale, Discarding, or Destruction of an Asset — Effect on the Block When an asset within a block is sold, discarded, demolished, or destroyed during the year, the moneys payable in respect of it (sale price, insurance/scrap value, compensation, etc.) are simply deducted from the block’s WDV before applying the rate — there is no separate gain or loss computed on that individual asset, so long as the block continues to exist and has a positive balance after the deduction. This is one of the most useful features of the block system for a growing business: selling an old machine at a profit or loss over its individual book value does not, by itself, trigger a taxable event. The sale proceeds simply reduce the pool on which future depreciation is calculated. 6. Illustrative Example — Additions and Deletions in the Same Block Consider a Plant and Machinery block (rate 15%) for a manufacturing client for FY 2025-26: Particulars Amount (₹) Opening WDV as on 1 April 2025 50,00,000 Add: New machine purchased and used from 10 June 2025 (used > 180 days) 12,00,000 Add: New machine purchased and used from 5 January 2026 (used < 180 days) 6,00,000 Less: Sale proceeds of an old machine sold in August 2025 (4,00,000) WDV before depreciation 64,00,000 Because the 180-day rule applies asset-by-asset only in the year of addition (not to the block as a whole), depreciation is split into two components for the current year: Component Base (₹) Rate Applied Depreciation (₹) Opening WDV + additions used ≥ 180 days, less deletions 50,00,000 + 12,00,000 − 4,00,000 = 58,00,000 15% 8,70,000 Addition used < 180 days 6,00,000 7.5% (half rate) 45,000 Total depreciation for FY 2025-26 9,15,000 Closing WDV carried forward to FY 2026-27 = ₹64,00,000 − ₹9,15,000 = ₹54,85,000. From next year, this entire figure is treated as a single opening WDV, and the half-rate addition loses its special treatment entirely. 7. When the Block Ceases to Exist — the ‘Block Deleted’ Concept A block can come to an end in two distinct situations, and it is important to tell them apart correctly: (a) All assets in the block are sold, but sale proceeds are less than or equal to